Tariff Escalation in World Agricultural Trade

AUTHOR

Fuzhi Cheng

CITATION

Fuzhi Cheng (2007). Case Study #10-11, "Tariff Escalation in World Agricultural Trade". In: Per Pinstrup-Andersen and Fuzhi Cheng (editors), "Food Policy for Developing Countries: Case Studies." 13 pp.
URL: http://cip.cornell.edu/dns.gfs/1200428210

EXECUTIVE SUMMARY

Tariff escalation, a common practice in international commodity trade, refers to a situation where tariffs are zero or low on primary products and increase, or escalate, as products undergo processing. It causes the price of value-added imports relative to raw products to increase, decreasing the demand for processed products in the importing country. Through tariff escalation, one country can effectively protect its domestic processing industries while limiting the scope of trade-related industrialization in foreign countries.

Tariff escalation significantly impedes market access for developing countries, particularly in agricultural trade. Higher tariffs for moreprocessed agricultural products have the potential to depress value-added activities and obstruct export diversification in agricultural exporting countries. In addition, tariff escalation is perceived as a source of environmental damage to exporting countries because excessive reliance on primary product exports can lead to depletion of natural resources and disturb the ecological balance.

Although the importance that developing countries attach to reducing tariff escalation is widely recognized, little progress has been made in this area. The structure of escalated tariffs in world trade is caused and maintained by the rentseeking behavior of economic agents and the resulting political economy of trade policies in developed countries. Food-processing industries in developed countries are proponents and beneficiaries of escalated tariffs. As agricultural commodity chains, particularly those of high-value crops and processed products, become increasingly dominated by a few giant multinational enterprises, industry’s incentives and ability to maintain tariff escalation grow stronger. Developing countries and consumers in developed countries are the losers from tariff escalation, but they lack the political power to change the existing regime.

Reducing tariff escalation is an important issue in the ongoing World Trade Organization (WTO) negotiations on agriculture. Recognizing that tariff escalation is widespread in the post– Uruguay Round period, many negotiating proposals have called for eliminating or reducing tariff escalation as an explicit goal within the market access pillar of the Doha Round negotiations. Studies have also shown that these proposals offer options conducive to further reduction in tariff escalation. A few technical problems may arise, however, and special consideration must be given to the least-developed countries (LDCs) to prevent erosion of their preferential margins.

The formation of a coalition of interests between the South and the North could make an agreement to further reduce tariff escalation more politically feasible. Furthermore, strategies aimed at reducing tariff escalation should be accompanied by other domestic and trade policies designed to enhance the internal capacity of developing countries. Sometimes these policies will involve financial and technical assistance from developed countries.

Your assignment is to recommend to the WTO a change in trade policy measures that would allow tariff escalation to be reduced and eventually eliminated.

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